So you’re ready to buy your new Condo, and you already read my previous article here. However, you just learned that your new Condo is a “Conversion.” This is where a Developer buys an apartment building and turns it into a Condo. A building may have a prime location where it is profitable for a Developer to buy the old property and flip it into Condos. Buying a condo conversion is more complicated than buying other condos for a number of reasons. As before, none of these items are intended to stop you from your dream home or implying all Conversions are bad, but they are questions to ask your real estate agent and keep in mind so you’re an educated buyer.
1) Deferred maintenance
This is the biggest item to watch out for. Many apartment buildings defer maintenance (for various reasons), and then the building is sold in a degraded state to Developers, who may or may not fully address the deferred maintenance. Examples of things that could be deferred include elevator replacement, roofs, HVAC, water boilers, facades, concrete garage repairs, etc. All of these things have useful lives and scheduled replacement or rehabilitation. A Developer may or may not comprehensively address the scheduled (or overdue) repairs. In a worst case scenario, they might do the bare minimum to extend the useful life past the warranty period. Review the disclosures and see where in their useful life these systems are and how much work the Developer has put into them – and make sure to let your real estate agent know you want their opinion (preferably in writing) on the state of repairs as well. Once the Developer is out of the picture and the building out of the warranty period, it’s on the Association – which means it’s on you.
Yes, I mentioned this in the last article, but I’m mentioning it again. New construction, if done correctly and without defects, at least starts a fresh “clock” on all of those maintenance items I just listed above. Putting it simply, if your roof has a useful life of 20 years, in a new building you should have 20 years before you need a new roof. A Conversion could be in year 10, or year 18, of the useful life of the roof. As such, in a Conversion, every major system is going to be at a later stage of its useful life. This makes Reserves even more critical, because some systems may need replacing, and without meaningful Reserves, a Special Assessment may be more likely. Find out if a Reserve study has been done and if the Reserves are sufficient to meet the needs of the building.
3) Warranty period
Find out how long the Developer would be liable for any defects under your local laws. Make sure your Board is aware of this date and aggressively is inspecting systems so that warranty claims can be brought in time. Some jurisdictions require Developers to post bonds – where the Developer sets aside money against construction defects for a fixed period of time, giving the Association a pot of money to go after if they prove there is a defect. Some jurisdictions don’t have this requirement.
4) Beware the corporate veil
This is where a corporation creates multiple layers of shell or holding companies that separate the core business (which has all the money) from the development project (which creates all the risk). Developers are smart and will create such a scheme, limiting the ability for your Association to recoup money from them in the event of a lawsuit, because the actual corporate entity that does the development won’t have a lot of cash in it, so even if you sued them successfully, there’d be no money to pay you. As noted before, some jurisdictions require development bonds to be posted in escrow to mitigate this behavior. You can also “pierce” the corporate veil, but it isn’t easy or cheap.
Make sure you know the risks when buying a condo conversion. They can be a good deal, and for a savvy buyer these are manageable issues, but for those not ready, there can be substantial surprises.